EASTERN EUROPE'S OIL TRADE

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00287R001001260003-1
• Release Decision: RIPPUB
• Original Classification: U
• Document Page Count: 13
• Document Creation Date: December 22, 2016
• Document Release Date: August 20, 2010
• Sequence Number: 3
• Content Type: REPORT

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EASTERN EUROPE'S OIL TRADE
Introduction
After sharply increasing imports of oil in the 1960s and
1970s, Eastern Europe now faces the problem of tighter oil
supplies. The USSR, which had covered nearly all of Eastern
Europe's growing oil demand on very favorable terms, has reduced
since 1982 the volume of deliveries to most of its allies, and
more cutbacks may be in the offing. The East Europeans are also
burdened by steadily rising Soviet oil prices, which have now
surpassed world market levels. Recently, Eastern Europe has
increased moderately its imports of OPEC oil, but little of these
deliveries seem destined for domestic use.: Instead, the East
Europeans are brokering the oil to generate much needed hard
currency. Because of financial prcbl~~a~., and the instability of
its main OPEC suppliers, Eastern Europe is unlikely to rely over
the long-term on non-Soviet sources to offset entirely the
reduced volume of imports from the USSR.
The Rise of, Oil Imports
Between 1960 and 1980, Eastern Europe reduced its reliance
on domestic coal and stepped up consumption of oil. Over this
period, coal's share in primary energy consumption fell from
nearly 85 percent to 55 percent while oil's share rose from a STAT
little over 8 percent to nearly a quarter (see Figure 1).
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Figure 1
Eastern Europe: Primary Energy
Consumption by Fuel
O [lectricitya
(~ Natural gas
l~ Uil
~ Coal
a
Includes hydro and nuclear power
b Projected.
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Eastern Europe accomplished this change in its energy mix largely
through a dramatic rise in oil imports (See Figure 2 and Table
1). Only Romania had significant domestic supplies of oil, and
even it began to boost imports sharply over the latter half of
the 1970s as domestic production declined because of dwindling
reserves. Thus, Eastern Europe's net oil imports of just 40,000
barrels per day (b/d) in 1960--about 1 percent of primary energy
consumption--climbed to over 1.7 million b/d by 1980 or one-fifth
of primary energy consumption.
The Soviet Union was the chief source of the oil import
surge. By 1980, net imports of Soviet oil were running at a rate
of almost 1.6 million b/d, accounting for well over 90 percent of
the region's total net imports of oil and about two-thirds of
total energy imported from the Soviet Union. This increase in
oil imports contributed heavily to the region's growing energy
dependency on the USSR (see Figure 3). Not only did Soviet oil
deliveries rise substantially,-but the terms provided Eastern
Europe were quite favorable. The Soviets did not raise oil
prices to Eastern Europe during the first OPEC price explosion in
1973-74 and since 1975 have based prices on average world prices
for the preceding five years. Moreover, Eastern Europe did not
have to pay for Soviet oil in hard currency and the Soviet Union
tolerated large trade deficits once the CMEA price began to
rise. This arrangement essentially shielded most of Eastern
Europe from oil price shocks while providing a continuing subsidy
as world oil prices rose.
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Figure 2
Eastern Europe: Oil Consumption and
Crude Oil Imports
~5 Imports of Non-Soviet crude oil
? Imports oPSoviet crude oil
~ To[al oil consumption
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EAST E[JROPEAN OIL BALANCES
(thousand barrels per day)
1960
1970
1975
1980
19831
F-pparent Consumption
317
1072
1661
2039
1821
Production
277
340
363
295
296
Imports
208
941
1555
2119
1830
Exports
168
209
257
375
305
Net Imports
40
732
1298
1744
1525
1Preliminary Estimate
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Figure 3
Eastern Europe: Energy Imports from the
USSR as a Share of Total Energy Consumption
t~ 1970
tri 1982
Bulgaria
Czechoslovakia
East Gcrmanv
Hungarq
Poland
Romania
Total
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UNCLASSIFIED
Thus, non-Soviet oil never played much of a role in Eastern
Europe's switch to oil except in the case of Romania. Some of
the countries had relatively ambitious plans for OPEC oil but
these plans were dashed with the second oil price .explosion in
1979 and the economic slowdown in the region, which lessened the
demand for energy. Excluding Romania, non-Soviet crude oil
imports by Eastern. Europe peaked at only 182,000 b/d in 1978,
accounting for less than 11 percent of total oil imports and just
3 percent of primary energy consumption.
Romania, on the other hand, sharply boosted oil imports from
.the Mideast and North Africa in the latter half of the 1970s.
With domestic roduction
p peaking in 1976 at 294,000 b/d,
Bucharest needed oil to feed-its growing refining industry.
Crude oil imports jumped to 319,000 b/d by 1980, triple the 1975
level, and provided nearly 60 percent of Bucharest's oil needs
(consumption plus exports). Well over one-half of these imports
came from just three countries: Iran, Iraq, and Libya. During
this period, Romania bought small amounts of Soviet oil in an
effort to diversify its suppliers,. but received no financial
breaks.
Oil Problems Develop
Eastern Europe's access to adequate amounts of cheap Soviet
oil came to an abrupt halt in the early 1980s. The region
entered the current 1981-85 plan period expecting annual
deliveries of oil from the Soviet Union generally to be held
constant at the 1980 level. Yet the region's energy picture
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worsened in the fall of 1981 when Moscow informed most of the
countries that it would reduce concessionary oil deliveries
beginning in 1982 and probably continuing through at least
1985. Annual deliveries to Czechoslovakia, East Germany,
Hungary, and possibly Bulgaria were cut by around 10 percent, or
by approximately 40,000 b/d each to Prague and Berlin, 30,000 b/d
to Sofia, and less than 15,000 b/d to Budapest. (Czechoslovakia
and East Germany may have made up for part of the cutbacks by
additional purchases at non-concessionary prices. It is still
unclear to what extent deliveries to Bulgaria were actually
cut.) The USSR apparently maintained deliveries to Poland
because of its precarious economic and political situation.
Warsaw reported only a minimal drop in Soviet deliveries of crude
oil in 1982.. Romania also was not affected by this change of
policy because it never enjoyed the favorable terms offered to
the rest of Eastern Europe. Bucharest has always paid world
market prices in hard currency or hard goods for the small
quantities of Soviet oil it has purchased. Bucharest,
nonetheless, cut back purchases because of its hard currency
crunch, reducing its imports of Soviet oil from as estimated
54,000 b/d in 1981 to just 7,000 b/d in 1982.
The rationale for the cuts is unclear, but the Soviets' need
for increased hard currency exports probably was a major
factor. Moscow also may have believed that the East Europeans
could absorb the oil reductions without jolting their
economies. In fact, the countries singled out by the USSR had
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substantially boosted oil product exports to the West in 1980-81
compared with 1979.
East Germany had doubled its oil product exports to over
80,000 b/d by 1981;
Czechoslovakia also boosted exports sharply to over
20,000 b/d in both 1980 and 1981.;
Hungarian exports were up by over 40 percent to around
18,000 b/d in 1981; and
Bulgaria, whose oil product exports were minimal during
most of the 1970s, exported some 30,000 b/d in 1980-81.
A Turn to OPEC?
.With the reduction in Soviet deliveries and the soft world
market for oil, several East European regimes have looked to OPEC
for more oil. Most of the oil, however, does not appear d~stineu
for domestic use. Rather the regimes are reselling OPEC oil--in
place of Soviet oil--to generate hard currency.
East Germany has kept active in the export market through a
comparatively high level of non-Soviet oil imports--around 80,000
b/d in 1983. For example, East Berlin reportedly has resold
Iraqi oil it received in a barter agreement with Baghdad.
Hungary concluded an arrangement with Iran in late 1982 that
increased crude oil imports by 20,000 b'/d and Budapest, in turn,
boosted oil exports. More recently, Bulgaria, Hungary, and
Poland have been reselling substantial amounts of Libyan crude
oil. During January-June 1983, the three countries imported an
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estimated 60,000 b/d from Libya compared with almost nothing
during the same period of 1982. Polish and Hungarian oil exports
for hard currency, in turn, tripled while Bulgaria sales
increased at a slower pace. The Poles announced that their
imports have come from a $230 million credit given in oil.
Bulgaria and possibly Hungary may have received their oil as
repayment for past credits extended to Tripoli--the Bulgarians
and the Hungarians have run sizable trade surpluse with Libya in
recent years. Some market observers, however, believe that the
Hungarians may have obtained at least some of their oil on 360
days credit and resold it for cash.
Czechoslovakia and Romania have been less active in the
world. oil market. Czechoslovakia apparently is keeping its
annual OPEC purchases to less than 10,000 b/d per year and is not
exporting much, perhaps a reflection of its relatively
comfortable financial positon. Romania, which saw its crude oil
imports drop 35 percent in 1981-82, is likely to keep imports
down as long .refining and reselling remain financially
unattractive.
Outlook
The East Europeans cannot expect a reversal of Moscow's 1982
cutback in oil deliveries, and indeed they must anticipate
further reductions. Moscow's need for~hard currency sales as
well as domestic production problems could well result in the
Soviets cutting deliveries to Eastern Europe again in the near
future. In addition, the East Europeans are no longer receiving
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a price break from Moscow since the CMEA moving average formula
has continued to rise while the world market price has fallen
from its 1981 peak. The CMEA price for crude oil rose to over 90
percent of the world market price in 1983 and has surpassed the
world market price this year on the basis of the 5-year moving
average pricing formula (see Figure 4). Thus, Eastern Europe
must increase the volume of its exports to the USSR--including a
possible diversion of goods from hard currency exports--to
maintain imports of Soviet oil and other key commodities.
The East European may be paying an even heftier price to the
USSR than that shown in Figure 4. Some Western observers believe
that the CMEA pricing formula for oil may have been changed from
one based on an average of world market prices for the preceding
five years to one using only the preceding three years. This
would result in a 24 percent jump in the Soviet oil price in 1984
compared witi~ 12 percent under the five-year formula. Press
reports in the past couple of months have cited a West German
study which claims that East Germany has been paying for Soviet
.oil using a three-year moving average since 1982. The West
German study may have arrived at this conclusion by dividing the
ruble value of Soviet oil delivered to East Germany in 1982 by
the volume reported in the East German press, which results in a
unit price close to one derived from a three-year moving
average. There is little evidence, however, to suggest that
other East European countries are paying according to a three-
year moving average. For example, energy price series from
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Figure 4
EASTERN EUROPE: CRUDE OIL PRICES
...................................................................
...........................................................
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i
i
__~
..................,,r......
o+
75
75 77 78 79 80 81 82 83 84 85
YEAR
Legend
OPEC PRICE
CEMA PRICE
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Poland and Hungary for 1983 suggest that the five-year moving
average is still in effect for these two countries.
Despite the current rash of activity in the hard currency
oil market, Eastern Europe is unlikely to keep increasing imports
from OPEC. Current trade largely involves Iran and Libya, both
of whom are relatively unstable suppliers. In addition, East
European goods traded for oil are likely to receive stiff
competition as the West becomes more actively involved in barter
agreements. Sizeable hard currency purchases from other sources
are unlikely. The outlook for the Eastern Europe's hard currency
import capacity remains poor because of sluggish export growth,
large debt service obligations for some countries, and poor
borrowing prospects.
In sum, Eastern Europe's oil trade is unlikely to pick up
from current levels over the next couple of years. Net imports
of oil probably,will remain at around the 1.5 million b/d mark.
Any further loss in imports--whether it comes from additiona l
Soviet cuts or reduced supplies from OPEC--will likely be
countered with reduced exports. Moreover, if the East European
regimes attempt to revive economic growth, domestic oil needs
will have to be met at the expense of oil exports.
UNCLASSIFIED
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